Problem 4 - Costless Magical MacGuffinConsider a consumer that lives only for two periods. He works in period 1 (and gets income Y1) and moves upthe corporate ladder in period 2 (and gets income Y1 < Y2).This consumer has the usual preferences over time: u(C1) + Bu(C2)1. Assume this consumer cannot borrow. What is the consumption in period 1 and period 2?Display graphically. Show the corresponding utility curve.2. Assume that now the consumer is allowed to save or borrow. Write down the new budget constraint.What is the consumption in period 1 and period 2? Display graphically. Could the consumer be worseoff? Could the consumer be better off? Draw budget constraints such that for one of them consumerprefers to borrow and for the other - prefers to save.3. Assume once again that a consumer cannot borrow, but can borrow and immediately sell someMacGuffins, and in the next period, the consumer must buy back the MacGuffins to return to thelender. Assume that MacGuffin trades at P1 >0 in the first period and is expected to trade at P,in the second period. Write down the new budget constraint. Would a consumer borrow a MacGuffin?What is the condition on the P,? Is P, a fair price of a MacGuffin? Could the consumer be better offwith a MacGuffin? Problem 4 - Costless Magical MacGuffinConsider a consumer that lives only for two periods. He works in period 1 (and gets income Y1) and moves upthe corporate ladder in period 2 (and gets income Y1 < Y2).This consumer has the usual preferences over time: u(C1) + Bu(C2)1. Assume this consumer cannot borrow. What is the consumption in period 1 and period 2?Display graphically. Show the corresponding utility curve.2. Assume that now the consumer is allowed to save or borrow. Write down the new budget constraint.What is the consumption in period 1 and period 2? Display graphically. Could the consumer be worseoff? Could the consumer be better off? Draw budget constraints such that for one of them consumerprefers to borrow and for the other - prefers to save.3. Assume once again that a consumer cannot borrow, but can borrow and immediately sell someMacGuffins, and in the next period, the consumer must buy back the MacGuffins to return to thelender. Assume that MacGuffin trades at P1 >0 in the first period and is expected to trade at P,in the second period. Write down the new budget constraint. Would a consumer borrow a MacGuffin?What is the condition on the P,? Is P, a fair price of a MacGuffin? Could the consumer be better offwith a MacGuffin?

Concerning two commodities, an indifference curve is a graph that shows which combinations of the…

Problem 4 - Costless Magical MacGuffin Consider a consumer that lives only for two periods. He works in period 1 (and gets income Y1) and moves up the corporate ladder in period 2 (and gets income Y1 < Y2). This consumer has the usual preferences over time: u(C1) + Bu(C2) 1. Assume this consumer cannot borrow. What is the consumption in period 1 and period 2? Display graphically. Show the corresponding utility curve. 2. Assume that now the consumer is allowed to save or borrow. Write down the new budget constraint. What is the consumption in period 1 and period 2? Display graphically. Could the consumer be worse off? Could the consumer be better off? Draw budget constraints such that for one of them consumer prefers to borrow and for the other - prefers to save. 3. Assume once again that a consumer cannot borrow, but can borrow and immediately sell some MacGuffins, and in the next period, the consumer must buy back the MacGuffins to return to the lender. Assume that MacGuffin trades at P1 >0 in the first period and is expected to trade at P2 in the second period. Write down the new budget constraint. Would a consumer borrow a MacGuffin? What is the condition on the P,? Is P, a fair price of a MacGuffin? Could the consumer be better off with a MacGuffin?

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter13: Capital, Interest, Entrepreneurship, And Corporate Finance

Section: Chapter Questions

Problem 1QFR